What makes you think that Amazon will decide to let its retail operating margins rise over the next few years? Over the past 20 years they found many opportunities to reinvest in the business to boost growth and expand into new markets. They still have many countries where they could decide to ramp up spending to gain share or position themselves better for the long-term. They also have a number of large market segments where they could decide to invest more (in opex or capex) for the long-term: healthcare products and services, cars, AI…. Why would ebit margins rise so fast from current levels in the next 3 or even 5 years? What would cause this change in long-term strategy?
Thanks Laurent, yes it seems like a massive jump but its mainly higher-margin revenue flowing through.
You are right they will continue reinvesting in the key areas you mentioned. But unlike its earlier days, the company is able to strike a better balance. There are so many opportunities to drive down cost to serve through automation (e.g., robotics) and scale economies. Also, Ecommerce is a business model that requires upfront investment and where profits and margins flow through with scale. I think Amazon has done a good portion of the upfront part and should benefit as they drive more volumes through its fixed network
Hi Laurent, thanks for the good questions. There hasn’t been a change in strategy. Amazon’s operating margins can rise even as it continues reinvesting, as it lowers its cost to serve (through automation, regional fulfilment, and other efficiency gains) and benefits from a mix-shift toward higher-margin segments like Advertising, 3P, and Subscriptions.
I have retail margins rising from the low 2% range toward ~3%, which is still below peers and Amazon’s own history. The business is largely past the upfront investment phase and has significant scope to drive further efficiencies. Ecommerce is a scale game. But importantly, the ramp isn’t dramatic — rather, a large portion of incremental group EBIT margins comes from the growing contribution from higher-margin revenue segments.
I was referring to your chart showing your expectation that operating margins in the retail business will rise from about 6% in FY24 to 10% in FY28. That’s a huge improvement…. I guess you are assuming that they will let the increasing contribution from high margin revenue streams (advertising, prime…) flow to operating profits…. but why won’t they find new opportunities to reinvest these potential operating profits just as they have in the past?
One key reinvestment growth engine that it's disregarded often is healthcare in US. Massive growth opportunity in an industry with bad reputation and it seems everyone wants to disrupt it.
Just a minor detail—I believe Amazon Ads was created before 2013, as in 2013, they had already reached the $1B revenue mark. At a>$50 run rate now, it's scary to see how rapidly it can grow. This is a fantastic blueprint for Sleep Well holdings—$SE, $MELI, and $GRAB.
What makes you think that Amazon will decide to let its retail operating margins rise over the next few years? Over the past 20 years they found many opportunities to reinvest in the business to boost growth and expand into new markets. They still have many countries where they could decide to ramp up spending to gain share or position themselves better for the long-term. They also have a number of large market segments where they could decide to invest more (in opex or capex) for the long-term: healthcare products and services, cars, AI…. Why would ebit margins rise so fast from current levels in the next 3 or even 5 years? What would cause this change in long-term strategy?
Thanks Laurent, yes it seems like a massive jump but its mainly higher-margin revenue flowing through.
You are right they will continue reinvesting in the key areas you mentioned. But unlike its earlier days, the company is able to strike a better balance. There are so many opportunities to drive down cost to serve through automation (e.g., robotics) and scale economies. Also, Ecommerce is a business model that requires upfront investment and where profits and margins flow through with scale. I think Amazon has done a good portion of the upfront part and should benefit as they drive more volumes through its fixed network
Hi Laurent, thanks for the good questions. There hasn’t been a change in strategy. Amazon’s operating margins can rise even as it continues reinvesting, as it lowers its cost to serve (through automation, regional fulfilment, and other efficiency gains) and benefits from a mix-shift toward higher-margin segments like Advertising, 3P, and Subscriptions.
I have retail margins rising from the low 2% range toward ~3%, which is still below peers and Amazon’s own history. The business is largely past the upfront investment phase and has significant scope to drive further efficiencies. Ecommerce is a scale game. But importantly, the ramp isn’t dramatic — rather, a large portion of incremental group EBIT margins comes from the growing contribution from higher-margin revenue segments.
I was referring to your chart showing your expectation that operating margins in the retail business will rise from about 6% in FY24 to 10% in FY28. That’s a huge improvement…. I guess you are assuming that they will let the increasing contribution from high margin revenue streams (advertising, prime…) flow to operating profits…. but why won’t they find new opportunities to reinvest these potential operating profits just as they have in the past?
One key reinvestment growth engine that it's disregarded often is healthcare in US. Massive growth opportunity in an industry with bad reputation and it seems everyone wants to disrupt it.
Comprehensive breakdown of Amazon, thank you!
Just a minor detail—I believe Amazon Ads was created before 2013, as in 2013, they had already reached the $1B revenue mark. At a>$50 run rate now, it's scary to see how rapidly it can grow. This is a fantastic blueprint for Sleep Well holdings—$SE, $MELI, and $GRAB.